Second, executives want to continually lower the performance bar to assure receipt of a bonus whether the company succeeds or not. The Forbes study showed companies would increase “cookie jar” reserves to save for reversal to beat targets in future years.
The third rationalization for earnings misrepresentation is that “everyone else is doing it.” A study by Simi Kedia, Kevin Koh, and Shivaram Rajgopal, titled “Evidence on Contagion in Earnings Management,” found that “earnings manipulation at companies was strongly related to the percentage of firms in the same industry or the same region that had announced restatements [of their financial statements] in the previous 12 months.”
Last, Forbes believes executives face very little accountability, usually getting to keep bonuses that through legal or regulatory actions are later determined to be unearned.
It’s difficult to see how current executive compensation practices really do align with the long-term, sustainable interests of shareholders. See The Trouble with earnings management as well as The Pay-For-Performance Misnomer for more on this topic.
January 2016
